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No used games means lower profits for game makers. Unless...
No used games means lower profits for game makers. Unless...
May 29, 2013 | By Mike Rose

May 29, 2013 | By Mike Rose
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    35 comments
More: Console/PC, Business/Marketing



As the debate rages on regarding how the next generation of consoles will handle used game sales, a recent study has found that if console manufacturers eliminated used game sales, the move could benefit the game industry.

The catch is that in order to reap any benefits, game makers would have to lower prices on new games, too.

As spotted by Wired, the study titled "Dynamic Demand for New and Used Durable Goods without Physical Depreciation: The Case of Japanese Video Games" surveyed 20 retail video games between 2004 and 2008.

For the study, released in December 2012, Masakazu Ishihara of the New York University Stern School of Business and Andrew Ching of the University of Toronto's Rotman School of Management pulled Japanese sales information from several sources, including weekly Famitsu rankings, and weekly average retail and resale values.

Through a series of mathematical equations, the pair reasoned that if the console manufacturers were to eliminate used game sales, this would cause an overall drop in profits of around 10 percent.

This is due to the fact that consumers take into account the eventual resale value of the games that they purchase, and removing the ability to resell games would cause some consumers to simply buy less games.

However, the report suggested that if the console manufacturers were to eliminate used game sales, and simultaneously lower the average price of video games by around 33 percent, they could potentially see their average profits per game jump by 18.6 percent.

"So roughly speaking, in the U.S., game prices should go down to about $40," Ishihara told Wired. "The reduction in price is partly driven by the fact that if the used game market were eliminated, gamers would no longer be able to sell their games and get back some money (so they need to be compensated)."

The report doesn't delve into what exactly would happen to retailers under these circumstances -- an issue that Gamasutra's Matt Matthews tackled earlier this week.

In a 2012 interview with Gamasutra, GameStop president Paul Raines claimed that 70 percent of income that the company pays to customers for traded goods, or $1.8 billion, is immediately spent on new games.

It's also worth remembering that the report only surveyed the Japanese video game market, and that the data involved came from sales made between 2004-2008, meaning that it only includes data on the first few years of the current console cycle.


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Comments


Nicholas Lovell
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I have an issue with this. It ignores the idea that different players have different amounts they want to spend on a game. Used games is, in fact, a variable pricing model.

The keenest players buy the Limited Edition and keep it.

The next keenest players buy the game at full price at launch, and keep it.

Less keen (or just as keen but more broke) buy the game at full price at launch, play it and trade it in after a few weeks or less.

Much less keen wait for the price to fall (and the publishers get most of the money)

Even less keen or even more broke pay the pre-owned price.

In other words, I fear that reducing the price of games is not the best strategy. The best strategy is figuring out a way to let customers spend whatever is the "right" amount for them. Pre-owned is part of that mix.

E Zachary Knight
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Game publishers really need to adopt a price reduction strategy. I think it would be fine for them to price a game out of the gate at $60. However, without a used market, that price will not get them far. They will have to drop the price after a while. First to $40, then to $20 and so on.

As you said, there are those gamers who must absolutely have the game right out of the gate. They will pay the $60 to have it right away. Everyone else is just waiting for that right moment.

Bob Johnson
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Well the industry would say they have variable pricing. If you want to pay less you wait for a price drop. Pre owned lets the budget-minded consumer participate day one however.

E Zachary Knight
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Bob,

I agree that they do have variable pricing. However, the current model moves far to slowly to support a market that excludes used sales.

Torben Jorba
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I never paid more than $10-$20 on a single player shooter. I have no interest to play them more than two times, then I give them away to friends.

A large group of the multiplayer consumers even don't play the single player campaign, so the packaging itself is nothing I'm interested in. Pachter recently said, that the publishers will never sell the singleplayer for $20, because they can expect to extract $60 from you and smile about the fact that you don't use their expensive multiplayer infrastructure.

Sorry, no sale for me. Its not an offer than I am interested. Recently I have rediscovered shooters on my trusty old PS3, which I can get in troves starting from $10. I hate the dual stick thing, but I go where the market makes reasonable offers.

Dan Johnson
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But it's not accurate to say that the "least keen or broke" people pay the used price. Here's how the actual pricing levels shake out:

New, LE: $80-150
New, standard: $60
Used: $55
New, 3-6 months later: $40

Gamestop aggressively pushes their good-as-new used copies even in the first week a game is available. They will call customers a week after they bought a new game to "remind" them that they can trade it in for cash.

And yes, "used sales" and "Gamestop" are effectively synonymous. They are 90%+ of the used game market (made up stat but I'd put money on it).
________

Steam is proof that a market without used sales will result in lower prices. The service regularly discounts games in the midweek, weekend, and special event sales. Preorders and new releases are frequently 5-15% off. And *many* high-quality games on the service land in the $15-40 range. Even AAA titles often sell for $50 instead of the $60 you'll pay for the same title on console.

Jonathan Murphy
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This is Pandora's box. It's been opened and we will bear the results.

Michael Pianta
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@Dan

I'm not sure that Steam proves that. To me Steam sales have less to do with publishers feeling free to lower prices in the absence of used games and more to do with the idea that digital files are simply not worth as much money, and many users will never pay full price for them. I have a standing rule of never paying more than $10 for a digital download, a rule which I've broken a couple of times but I generally hold to it.

Hakim Boukellif
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Now if we also had:
* A method of preventing the sale of used games that isn't dependent on the existence of a server that only runs for as long as the platform owner considers it worthwhile.
* A way of having a game be for sale indefinitely, regardless of its popularity, economic condition of the companies involved and licensing issues.
* A public that's willing to go through the effort of having their unused storage media recycled instead of chucking it in the bin.
...then we might actually have a justification for disallowing used games sales.

Jannis Froese
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* A way of having a game be for sale indefinitely, regardless of its popularity, economic condition of the companies involved and licensing issues.

We mostly have this for PC games. I can buy twenty year old games just fine on steam or gog, despite the extra effort necessary to make them run on modern PCs.

Hakim Boukellif
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Only the ones that are popular enough and the license holder is willing to sell. For example, the only way to (legally) obtain Grim Fandango right now is by buying a used copy.

It's good that things like GOG, Virtual Console, PS Classics etc. exist, but they'll never be a complete replacement for used game sales.

Phil Maxey
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There are people who will just stop buying games if they can't buy them 2nd hand, it's as simple as that, and the question then becomes will the AAA industry respond by dropping their prices or will they stick their heads in the sand and all hope for a COD style success? My instincts are that it's all heading for F2P, even AAA, it's just going to take longer for AAA to get there. No used games is the first step in that direction.

Amanda Lee Matthews
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The people that are only buying used games aren't making the companies a profit anyway; why would they care if those people stop buying games?

Jannis Froese
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So you say there are people who only buy games because they can buy the way below original price? They wouldn't buy a small game or indie game for $10 instead, and the occasional COD? I doubt that.

In every case, whatever publishers do, it can only cause those people to pay more to publishers and developers, not less.

Samuel Hayward
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@ Amanda

The people only buying used games are the people who can't afford to buy new at whatever the current price is.

They are still valuable people because they still spread your brand(s) and become invested in them. When they actually get money in the future, or save up for a new game on launch day, or trade in for a new game, what brands and franchises are they most likely going to go for? Certainly not any of the ones that they couldn't play used in the first place, because those brands/franchises have no penetration with such a user due to a used game block.

It's extremely rare for anybody to ONLY buy used games, and if they do you can expect them to be people who are likely very young in age and rely on gifts for their gaming pleasure. Which is another point, what kinds of games are the kids gonna ask for their birthdays and their holidays? It's going to be most likely the games they've already played and experienced (or related to them), not likely to be ones they haven't. Prohibiting a used sale or preventing game-sharing-between-friends to such an audience means you are unlikely to get many dedicated gamers with their own developed tastes and liking of specific brands. Especially at an age where their curation of taste in games and franchises they will grow to love and become invested in is still new.

Joe Rielly
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@ Amanda, well actually the publishers are making money off of used games because used games are subsidizing higher prices for games for a longer period of time. As this article points out, if you take away used games the price of games will have to fall dramatically shortly after release. Now, publishers have to sell a larger volume to capture their optimum revenue and profit levels. There is not an infinite amount of people that are interested in playing video games and even certain genres and certain games.

David Serrano
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Or consumers will start to do what I've been doing in 2010, wait until the price drops to what they perceive each game is worth. Based on my purchasing experienced between 2006 and 2010, I now will not purchase any AAA games until the price drops to $20 to $30 range. So I typically end up playing games 6 to 12 months after they release.

Ramin Shokrizade
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The move to online gaming, and especially F2P, is already undermining the traditional $60 retail game. Prices under the retail model will have to drop anyways just because of the presence of a more effective competing business model.

That said, you also have a huge drop in the number of AAA games being brought to market as investment dollars move to social network and mobile game development. Very expensive games have been attempting to go above $60 by using hybridized models, GW2 and D3 being recent examples, with mixed results.

In any event I see the whole retail games archetype as having a very limited lifespan so it is smart to move to Games as a Service, which seems to be what Microsoft is doing here. Their new console might be about to come out, but it has to do duty for years to come, so it is not necessarily being built for yesteryear's games, but for tomorrow's games.

Adam Bishop
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@ Amanda

Well, as an example, when I was in college and had very little spending money I would predominantly buy used games. That kept me attached to the hobby through those years. Now that I have a degree and a full-time job and much more money to spend I buy lots of games (my Steam library is around 100 games and my console library for this generation is probably at somewhere around 50). If I hadn't been able to keep gaming at the lower price point offered by used games when I was younger I may have dropped the hobby and now the industry wouldn't have any of the thousands of dollars I've spent on games since then.

Kyle Redd
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@Amanda

"why would they care if those people stop buying games?"

Because used game buyers are not the only folks that are getting screwed by the new restrictions. Here's the full list:

- Anyone who buys used games or sells them to others
- Anyone who loans or borrows their games to and from friends
- Anyone who values the long-term viability of their games (those that like to revisit games they loved years later, or wants to pass on their games to the next generation when they die or stop playing)
- Anyone who believes games have artistic or historic value (those that study or play older games from the past through emulation or other means)
- Anyone who cares about consumer rights

The remaining people are those that will have no objections to the new system. Exactly how large of a percentage of the market do you suppose that group is?

Amanda Lee Matthews
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I think the lost sales from [people that already buy new games] buying slightly less games will be more than made up for by [the people that use to only buy used games] buying new games... If there even ARE any lost sales. I certainly don't think it will be 10% - most people doing trading in, and buying recently released used games are not doing so due to lack of money, but more for the IDEA of getting a few bucks back/saving a few bucks. When that's no longer an option, most will just deal with it and spend the few extra bucks.

Yong Wu
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@Amanda I think a lot of people are under the impression that people that buy games have infinite amount of money. It all comes down to X person has Y amount of disposable income and Z amount has been allocated to buying games. Unless they are hardcore into games Z will not increase by decreasing money set aside for other things. When Z along with trading games used to get you 10 new games before, now it gets you 5 new games. The person will therefore be a lot pickier when buying games in general as they have to be thriftier and or they slowly get weaned from playing games. Extra couple of bucks you mention are only extra couple of bucks for those that have very big Ys so unless you want your target audience to be whales then I don't see how it's realistic to not expect any lost sales.

Ujn Hunter
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I for one spend thousands of dollars a year on games (90% new, 10% old "retro" used). I will not be buying any games for any system that does not allow games to be bought used, or games that require DRM activations. Imagine if your favorite game (mine is God Hand on the PS2 btw) wasn't playable in 5-10 years time? Thank God Hand that I can still buy and play God Hand on any PS2 or BC PS3 I can find.

Seth Strong
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My opinion is that software producers just need to lower the cost of their game over time. More price conscious consumers and/or less excited consumers will simply wait. People with a higher propensity to spend will consume as soon as the price falls to an acceptable level. I thought that was the point of getting rid of GameStop actually. The industry wanted its tail back.

Joshua Pickard
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So follow the money: The argument is that used game sales only benefited the retailer and the consumer as the publisher and developer only got paid on the original unit sale. We know the mindset and habits of the customers which are unlikely to change. We know the retailer is interested in the sale, no matter how it goes down. Understandably, the publisher, and by extension, the developer, just want a piece of the resale action since it is their efforts which began the chain of events leading to that sale. The always-online DRM of account/licence control seems to be the inevitable conclusion of this logical chain of thought... for the producers. Yes, it will chafe on the retailers and consumers, but short of a voluntary reporting system by retailers (not happening), there just isn't another obvious method of compensating the publishers (and developers) for their services and efforts.

Business is business and sometimes it gets nasty. GameStop might not last the decade due to being the disposable middleman, and that's life. (See: Blockbuster Video) I just hope that when the aforementioned licence servers are phased out for the NEXT next-gen consoles that there is some kind of update pushed out to the consoles removing the online validation process. That way people can still play the games they have in their possession without the company's overhead cost of maintaining a server.

Joe Rielly
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Another dimension is install base. The next gen will not have a 50 million install base over night. If consumers do not like the used game fee or no used games they will stay with their current gen that allows such practices. Thus, the theory of selling more games at a discounted rate would be much harder to achieve. Install base is very important look at the wii u and EA.

David Serrano
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If you asked Bruce Bueno de Mesquita to confirm this theory using his prediction model, he'd tell you the research data used was incomplete. Without more detailed data on consumer's overall spending habits and how different demographic groups perceive the value of different types of games at different price points, the theory could be slightly off or completely wrong.

Fernando Coelho
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I find this a terrible idea, if life has taught me one thing is that you do not screw up with people that are your clients or they will screw you back as soon as they have a chance. And please, don't act as this is a business only matter, game consumers are people. How do you think they will feel when they can't take that new great game to his friend house to show him or to a party to play together? Happy or screwed?

Also, why the heck do you want less people playing your games? If he is poor today and can't afford the game, this is likely to change tomorrow. When you reduce people access to your games, you are losing future customers, simple as that.

When people fell that the games are more expensive, what will they do? Small hint: "Do what you want 'cause a pirate is free". The worst part of it is that once someone spends time unblocking a videogame, do you think that he/she will ever go back and buy a game? It seems highly unlikely to me.

Finally, there are loads of great free to play games out there, the harder you make the access to your games, the more people will lean to free alternatives.

daniel birchal
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There's one more thing! Who said used game buyer don't buys DLC????? So this is one more revenew that will die with used games!

Torben Jorba
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I think certain people will get increasingly picky what the buy. And then they will look around what there is else to play in their financial price range. There will be different offerings, like Android/Steam/PS4? where you trade less shiny HD graphics with similar enjoyable gameplay for a fraction of the price.

I also don't believe that XBone or Ps4 will cut Gamestop completely out. I rather believe that they will take at huge chunk of the cut. Also there is still a XBOX360 and a PS3. Those games still need to be sold for at least two years. I doubt they will accept the loss of shelf space for the next eight quarters for potential bigger revenue in the future.

daniel birchal
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I alredy commented this in another article but since the topic is pretty much the same i'll just paste it here;
People on this industry must understand that the right to re-sell, share or do whatever they want with the the product(game) IS seen as value by the customer! If you take that from the customer, they'll see less value in your product and a 60$ sell WILL be much harder. Meaning that less units will be sold. And will affect the attach rate too as people won't take riscs buying games they don't know since there's low or no re-sell value. So, expect even harder times for new IP!
The DRM brings no benefit and some big issue for the customer: when the server goes down they'll loose their console and the entire game library. People don't mind loosing their 10$ arcade games after the server goes down but a 60$ AAA it's another story!
"Full games" (not XBL arcade or PSN) are the reason that people buy consoles and knowing that will loose it in a few years makes the sell even harder.
Using myself as an example I have 107 Xbox 360 games, I would NEVER build a huge library like that if I knew I was going to loose all of then in few years!
This could also have a serious effect on the install base for this consoles, specially in the early years, and if the install base is small then so are the sales.
Every industry in the story of man kind survived the used market so why should be the gaming industry any different? It survived the last 40 years right? If things aren't THAT good, then moving AGAINST your customer isn't the smartest path as you can and, with such actions eventually will lose them!
A move like that sounds more like a suicide to me! You will kill your golden goose!

Marc Fleury
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From where are we concluding that the games will become unplayable in a few years, when Microsoft's servers are taken down?

I thought the idea was that the user would need to register the game the first time they run it on their console. After that, what difference to the servers matter?

daniel birchal
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Q:From where are we concluding that the games will become unplayable in a few years, when Microsoft's servers are taken down?
A:From Microsoft statement that the console must check every game license once a day! Other thing is after the server is down how can you transfer the licences from one HD or console to another? You won't be able, so you loose your game colection if when your console fails.

Lloyd Tullues
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"... gamers would no longer be able to sell their games and get back some money (so they need to be compensated)."

This line of thinking was really surprising to see, insofar as it assumes that your average (intelligent) consumer even remotely thinks like this. A price drop is a price drop and will be perceived as a price drop; the gamer is not going to justify the inability to sell a game back by way of $20 of savings. In other words, if a gamer is annoyed that he can't sell his game back he will remain annoyed whether the price drops from $60 to $40 or even $20.

The increase in revenue on a price drop is simply that it will drive up demand and, thereby, overall sales. You'll see the same effect whether or not used games are still an option. The point is - if the used game market is eliminated you won't be able to appease the annoyed masses by a price drop. Said price drop is only to offset the loss of revenue, nothing more.

Chris Wightman
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I think many people are missing another huge issue. Microsoft thinks they can force the issue by making users register the game with a code to their box or account. That of course makes it hard to trade games for a week with friends, among all the other issues it causes, since the game will now be tied to your account.

However, it seems no one is addressing the fact that most likely, the community just isn't going to let this happen. We're not just going to be like "oh yay, that butt reaming was great" with a smile on our faces. I believe we are going to see a huge spike in the development of cracking systems for these consoles. For those people who don't pay for XBOX Gold (another scam I have never bought into - I just enjoy playing my MP games on PC instead), there really isn't much of a threat from Microsoft to consider. They keep screaming "we're in power" but I don't think many of us are really trying to hear that. I'll gladly pay $50 for something that "jail breaks" my XBOX for the right to play whatever I want on it. And that of course hurts them even more then on the lost used game sales - i'm sure at the point there will be plenty of players that decide screw it - why pay for a game at all now that my system is cracked. Almost like the "gateway drug" to more activities that they don't want users engaging in. This is a dangerous slippery slope Microsoft is on right now.


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